YIELD

We at Markowski Investments are always keeping a close eye on what our competition is up to. Lately we have noticed that our competition’s advertisements and sales literature have all pretty much read the same. Something like this…

“Don’t worry about the volatility just keep buying, it is impossible to time the market so don’t bother trying. Stay fully invested all the time, ride them up and ride them down.”

The most famous line I have heard recently was that if an investor missed the best ten days in the market, that investor would have seen significantly less than if he just bought and held. After living in New York City for the past five years I have become a bit of a skeptic so I did some investigating of some of these claims.

In the book Lasting Wealth is a Matter of Timing, they put together some statistics that question the buy and hold pundits. Taking a time period from 1980-1989, if an owner of the S&P500 would of missed the 10 highest performing days, that investor would have seen a return of 12.7% versus a buy and hold strategy of 17.6%. However, if an investor missed the 10 worst days during that period, their returns would have been 26.6%. Furthermore, if you missed the 10 best performing days because you were being careful, but on the same note, you missed the 10 worst performing days, your return would be 21.1%. An investor was better off missing the 10 worst days than capturing the 10 best. If you missed them both, you still beat the buy and hold theory. We feel that managing risk is the most important aspect of portfolio management. The task of risk management does not mean to time the market to perfection; we do not have a crystal ball. Despite belief to the contrary, market timing does not target getting in and out of the market at the absolute bottoms or tops. It does however; strive to allocate the investors assets in the right arenas before a major correction devastates the portfolio. Market timing is a tool to preserve capital.

Here is a little food for thought. How many baby boomers do you know, who are approaching retirement or have children in college, could withstand a drop in their portfolio of 75%? Probably not many. Between 1973 and 1974 the market did just that. An investor who bought into the highs had to wait out 7.6 years to break even. Even worse, an investor who bought into the market highs of 1929, had to wait twenty-five years to break even. Baby boomers, who might need their money within the next ten years, might want to get serious and devise a logical game plan for their future. It is not wise to buy into such high valuations and hold with the blind hope that stocks will continue to go up. The “cyber-casino” will not last forever. The Internet companies that can rise so quickly can come down just as fast.

Investors should be honest with themselves. Ask yourself or your portfolio manager what is the game plan for the future? How will your portfolio perform if the market does correct 30 to 40 percent? We at Markowski Investments design portfolios based on preservation of capital. Believe it or not, it is possible to beat all the major indexes in performance and also be able to weather any market storm…